Ghana will not see immediate returns from oil find

Despite optimism about Ghana's oil find, with expected future production of 120,000 bpd, experts say Ghana faces a difficult transition before the oil starts flowing.
In her latest analysis of the Ghanaian economy, Razia Khan, Regional Head of Research, Standard Chartered Bank, Africa, states that a study done by the IMF (last year, when oil prices were higher), suggested that Ghanaian growth could double to 12 % by 2012. At the peak of oil production, expected in 2018, revenue to the government could total over $ 1 bn a year. More conservative production estimates, based on output of 40,000 bpd, suggest that it would yield government a revenue of at least $ 200 mm annually. Most analysts agree that production is likely to be in excess of this.

The analysis further asserted that despite the optimism, however, the key point is that Ghana will not see any significant revenue for some time.
"Oil production is due to start by late 2010 at the earliest, but most probably by 2011. Even then, development costs are likely to be recovered first, before any significant revenue accrues to the government. Although there are likely to be royalty payments, it could be a while before Ghana starts to earn any substantial revenue from oil. Based on industry norms and production of around 120,000 bpd at the current oil price, we calculate that royalty payments might total between $ 100-130 mm. But initial oil production is likely to fall short of 120,000 bpd, so even this might overstate the earnings that Ghana might expect at the outset, unless of course, oil prices recover," a report said.

The report said, given the promise of future oil production, Ghana's options appear to be somewhat constrained. The country's ability to borrow against future oil receipts is likely to be compromised by at least three factors -- current weakness in the oil price (which will be seen to raise the risks associated with the development of Ghana's oil sector), the financial crisis -- which constrains the availability of credit, and the current state of Ghana's finances -- in particular its sizeable twin deficits.
"It is probable, therefore, that Ghana will need to seek financing on non-commercial terms to see it through this period".

The reports further states that although Ghana has long been favoured by bilateral donors, who are keen to support the country's democracy, there are several important considerations. First, Ghana's post-HIPC decision to tap non-concessional financing through its maiden Eurobond issuance in 2007 was controversial. Donors had argued against it, warning of the debt sustainability issues that could arise.
Second, there is the fiscal situation that the donor countries find themselves in, given the cost of their own bailout packages to deal with the financial and real economy crises experienced in these countries. Bilateral assistance is unlikely to be available in any scale, unless it comes from non-traditional partners such as China, which is keen to establish close ties with a newly emergent African oil producer. Such a scenario cannot be ruled out, but it is by no means certain.

The report indicated that the availability of budgetary and/or Balance of Payments support will depend crucially on the adoption of a package of austerity measures -- raising domestic interest rates further (resulting in further pressure on short term interest rates), and cutting spending down steeply.
Although such spending is likely to be available, Ghana still faces a very difficult adjustment period.